A common question facing the board or management team of a small or midsize business is how to reverse a plunge into decline or distress?
Given the turmoil in the financial and business markets, many good companies find themselves with:
- A weak balance sheets,
- the need to recover and reposition for the new reality in the markets and,
- the opportunity to take advantage of emerging opportunities.
Where to start and how to change the momentum in the company's favor? It can be done.
Stuart Slatter and David Lovett identify the areas of focus and the steps that have proven valuable in turning companies in the right direction. Coupled with solid cash-management practices, these steps provide a road map for progress. The core areas to address begin with gaining control of the cash and end with “fixing” the balance sheet. Management that tries to start at the end, without a credible, well-vetted plan, will find the going difficult. So let’s walk through each of the key areas and their steps:
- Crisis Stabilization: Address a deteriorating situation and take control of cash flow and short-term financing. Begin with fully understanding all cash sources and minimizing cash outflows until there is a recovery plan. If possible, short-term bridge-funding sources are identified and pursued to fill the gaps.
- Leadership: Make sure the right talent is in the right seats on the bus, particularly at the top. If existing leadership expects to stay in place, they may need to re-prove themselves to their stakeholders to assure continued support.
- Stakeholder Support: Communicate with those involved in the business – internally and externally. Sometimes it isn't easy, but communicate the progress and trials to keep stakeholders from being caught off-guard and surprised.
- Strategic Focus: Reduce assets and focus on the core business. Part of rejuvenating a business is making the tough decision of where to focus and what resources to harness. It may also mean selling off some noncore assets to generate cash.
- Organizational Change: Establish new terms and conditions for employment and make structural changes to run with a smaller team. Once the strategic direction of the business is set, the team needs to be shaped to implement the plan. Laying off teammates is never easy, but a positive way to view this step is that it can re-energize the remaining team with confidence in a clearer and focused plan.
- Critical Process Improvement: Focus on cost reductions, quality improvements and increasing revenues. The business got in trouble for a reason. Take a critical eye to the core business processes and indentify opportunities to operate more efficiently while accelerating revenues. In a production environment, this would be an ideal time to consider implementing lean manufacturing concepts; and for administrative and service operations, similar lean-enterprise concepts may be of value.
- Financial Restructuring: Work out liabilities and make financial commitments to a level that the renewed organization can meet. This is restructuring in the traditional sense. It may mean raising capital or finding longer-term bridge sources of funding until the business can return to predicable profitability and positive cash flow. This step may also open the door for conversion of some liabilities to equity and renegotiating the terms of existing debt.
Given its importance in the turnaround process, the experts circle back to cash management.
Here are battle-tested, proven guiding concepts. Some are tough medicine and not easy to implement, but all have the same critical objective - to generate and preserve cash to assure the business has adequate resources to make it through the recovery process. In reality there are always exceptions, but they should be few.
No disbursing cash unless it directly relates to more cash generation (i.e., revenue).
- Implement a weekly cash-flow-management routine so the team can see cash inflows and committed cash outflows.
- Prioritize cash payments to those that help move the company forward and that are part of the solution; others will have to wait.
- Focus on critical sources of supply that enable revenue generation. Develop payment and financing plans to assure these suppliers have priority.
- Communicate the truth with creditors and be positive. At first, share that the company is creating a work-out plan to will permit a realistic repayment schedule; and then periodically provide status - good and bad news.
- Sell only to customers that pay quickly and dependably.
- Aggressively collect accounts receivable.
- New money (i.e. bridge loans, stock sales, etc.) goes to resources that generate revenue and to pay for go-forward activities, not to pay old debts.
- Communicate the plan to all stakeholders and periodically provide status on progress and issues.
Most suppliers and creditors realize that a company in bankruptcy will have less to pay them, not more; but they won’t support the recovery if the company cannot convince them of a realistic go-forward plan.
Part of this means sharing the truth and setting expectations and commitments that the company can meet. In today’s economy, many companies are confronted with cash issues and strategic problems.
Being proactive will likely increase chances of recovery and positioning so that the company can move from surviving to thriving.
Stuart Slatter and David Lovett are the authors of Corporate Recovery: Managing Companies in Distress.